The Department of Justice filed a complaint to stop AT&T's (T) proposed merger with T-Mobile USA Inc, worth $39 billion, citing anti-trust issues. The DOJ also requested a court order to stop the deal from being consummated. My question is, why did AT & T ever think this deal would go through given the U.S. markets current competitive structure?
Through the second quarter of 2012 the four largest carriers controlled 93 percent of the U.S. market.
(Click to enlarge)
Source: Chetan Sharma Consulting 2011
One of the ways to measure market concentration is the Heffindahl-Hirshman Index or HHI, which I've heard was popular with the Justice Department at one time and I would posit that it still is considering their decision to try to block this deal. The HHI is the square of the percentage market share of each firm summed over the largest 50 firms in a market. Here is the pre-merger market HHI which already suggests that the market is uncompetitive.
| U.S. Carrier Market Concentration based on Subscribers | ||||
| Company | Ticker | Pre-Merger Market Share | Market Share Squared | |
| Sprint Nextel | S | 17% | 289 | |
| Verizon | VZ | 34% | 1156 | |
| AT & T | T | 31% | 961 | |
| T-Mobile USA | 11% | 121 | ||
| MetroPCS | PCS | 3% | 9 | |
| Leap Wireless | LEAP | 2% | 4 | |
| US Cellular | USM | 2% | 4 | |
| Herfindahl-Hirshman Index | 2544 | |||
The Justice Department will generally investigate any merger of firms in a market where the HHI exceeds 1,000 and will very likely challenge any merger if the HHI is greater than 1,800. With a HHI over 2,300 any deal will be heavily scrutinized and most likely rejected. Even a merger between T-Mobile USA and Sprint (S), with a 28% market share would probably not be allowed on the same antitrust grounds.
Perhaps management over at AT&T thought they could come bearing gifts, or perhaps bake a cake for the investigators and they would overlook the competitive landscape. Management over at Deutsche Telekom (DTEGF.PK) and T-Mobile USA may have had this in mind when they requested $3 billion in cash and additional wireless spectrum worth up to perhaps another $4 billion if the regulators rejected the deal. The think tank over at AT&T should have expected this. Well played Deutsche Telekom, well-played.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
